REN: Underappreciated regulatory stability
Following a period of restriction we reinstate coverage of REN with a BUY rating and a FV of Eur 3.05. We continue to view REN as an attractively priced low-risk option within the utilities sector and which continues to trade at a significant discount to European TSOs (-21% on 18E EV/EBITDA). A new regulatory period for electricity will begin in Jan-18 and we are expecting a downward revision of the allowed return (by 20bps) but no other major changes to the framework. In our opinion this stability of the regulatory framework is a valuable but underappreciated quality of REN’s which should become more visible as regulatory uncertainty casts its shadow on the other Iberian TSOs. We are also updating our estimates to account for the recent purchase of EDP Gas, including a Eur 250m rights issue which will allow REN to maintain its investment grade credit rating and DPS paid of Eur 0.171. While in our opinion the acquisition price fully valued the qualities of the asset, EDP Gas’ operations are a good fit to REN’s current businesses.Ren Redes Energeticas Nacionais is engaged in two principal lines of business: electricity transmission, where Co. owns and operates Portugal's national high-voltage electricity transmission network (the "RNT"), and natural gas, where Co. is engaged in the reception, storage and regasification of liquefied natural gas ("LNG"), the operation of the national high-pressure gas transmission network, which Co. owns and operates under respective concessions and the underground storage of natural gas. Co.'s electricity transmission business is conducted through its subsidiary REN - Rede Electrica, which holds a 50 year concession to operate the electricity transmission network in Portugal.
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